In our previous client alert, The UK Consumer Duty: Next Steps for Private Fund Managers, we explored the new consumer duty rules contained in PS22/9: A new Consumer Duty. As we noted, the duty applies to managers who provide services for a retail customer defined, in the context of an alternative investment fund, as an investor in the fund or the beneficial owner of interests in the fund and is not a professional client. The Financial Conduct Authority (FCA) rules and guidance governing the duty come into force as follows:
- For new and existing investments open for sale, on 31 July 2023
- For closed investments, on 31 July 2024
There is also a deadline on 30 April 2023, for manufacturers, which includes in-scope managers, to have conducted cross-cutting rule reviews and shared information with distributors.
On 3 February 2023, the FCA published a Dear CEO letter, Implementing the Consumer Duty in Asset Management, Custody, & Fund Services and Alternative Portfolios, addressed to private fund managers (described as firms that predominantly manage alternative investment vehicles or manage and advise alternative assets directly) as well as mainstream asset managers and firms providing custody and fund services. The letter addresses elements of the consumer duty, noting that there are some considerations which depend upon a firm’s business model and its portfolio.
With a view to the deadlines above, private fund managers will need to consider the extent to which the duty applies, noting the touch points below, ensuring that they are planning for implementation, and considering the practical points and recommendations in our previous client alert, The UK Consumer Duty: Next Steps for Private Fund Managers.
For private fund managers, the recent FCA letter serves as a reminder of two touch points: client categorisation and opting up and dealing with high net worth or sophisticated customers.
The Client Categorisation Progress
Firms working with investors who elect to be treated as professional clients under COBS 3.5 are not subject to the duty. However, even if a manager does not target non-professional investors, the FCA expects:
- A due diligence process connected with client categorisation that prevents investors with a lower risk appetite from gaining access to (high risk) investments that do not match their objectives.
- Managers that onboard retail or elective professionals to review their processes to ensure they are effective, including the procedures for checking that elective professional investors meet the quantitative and qualitative tests in the COBS 3.5 section of the FCA rules.
This FCA focus area was evident in its January 2020 Alternative Supervision Strategy Portfolio letter (covered in our previous briefing, Back to Business: The FCA’s 2022-23 Priorities for Private Fund Managers) and is reiterated in the February 2023 letter — where the FCA states: “If a customer has been incorrectly classified, or the firm becomes aware that a customer has been incorrectly classified earlier in the distribution chain, the firm should reclassify the customer and restore the correct level of consumer protection.”
High Net Worth and Sophisticated Investors
The FCA notes that many firms have customers who are categorised high net worth or sophisticated. More specifically, these would be broken down as follows:
- Self-certified high-net-worth investors
- Certified sophisticated investors
- Self-certified sophisticated investors
We addressed the recent changes to the FCA rules on promotions of non-mainstream pooled investments (NMPI) to these (and other types of investors) in our recent alert, The Remaining New Financial Promotion Rules for UK Private Fund Managers: Less Than a Month Away.
As the FCA notes, these are still retail customers and the new FCA Principle for Businesses 12, which states: “A firm must act to deliver good outcomes for retail customers,” will apply to them. The four consumer outcomes and the cross-cutting rules, noted in our previous client alert, The UK Consumer Duty: Next Steps for Private Fund Managers, may also apply.
An absence of grounds for an FCA-authorised private manager to classify an investor as a professional client will have potentially have more significant consequences once the duty begins to apply, than is currently the case.
To discuss the contents of this alert, please contact the authors or your usual Goodwin contact.
Ajay PathakPartnerCo-Chair, London Office
Chris OrmondKnowledge Management Counsel